I think I said this before, here on doitinvest.com: banking is a trust business. And when the trust is lost, you can bet that half of your clients are almost gone for the emergency exit.
The reason for this is quite simple – in banking a customer buys your ability to deliver a promise. He/she wants your financing for the long term (mostly desirable for the seller), your ability to generate revenue for the customer, your superior investment yields. It is all about the money.
In their book “The Trusted Advisor”, the Harvard professors who authored it argued that a counselor of any king must strive in essence to do 2 things:
– to build a trusting relationship with the customer, showing that he cares about the client more than about his money, and
– to demonstrate continuously this relationship in an active manner, by doing better what the counselor is supposed to do – reate value for the customer.
The fraud charges (obviously strongly denied by the accused Goldman Sachs) represent therefore a huge image blow for the US banks. One is to suspect that the investment bank, your trusted advisor, might play around with your money. And a totally diffeernt thing is to be almost certain about it. Well, Goldman Sachs, one of the biggest and most respected banks in the world, just crossed the big divide. And remained there.
The effects on the banking shares will be twofold. First of all, all the banking sector will obviously suffer from this trusting crisis. The shares will tumble and the sector might decrease even further in average share price, especially since the aftermath echoes and trials will go on the press. And even if Goldman Sachs will gain the fight back and turn around the allegations, the stain will remain.
On the medium term (one to six months), the story is different. Goldman Sachs’ customers still need to go somewhere to do their business. They still need to take loans and invest their financial resources at superior resorts. And they will go the Goldman’s competitors. I bet that in secret the directors of Citibank or of Merril Lynch are quite happy about their sector noeighbour’s troubles. It means that they will get some big additional customers soon – at least until they remain with their noses out of the insider dealing problems. And their shares will surge too, of course, based on better fundamentals.
So it might be a good idea to be long on banking over the long term. Or not?